Difference Between REIT and InvIT: Meaning & Types

The introduction of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) has revolutionised the Indian investment landscape. Originally introduced in the US during the 1960s and sanctioned by the Securities and Exchange Board of India (SEBI) in 2014 for India, these vehicles offer a structured and lucrative way to invest in real estate and infrastructure sectors. While both REITs and InvITs share some similarities, understanding their distinct characteristics is crucial for investors seeking to diversify their portfolios.

What Are REITs and InvITs?

Real Estate Investment Trusts (REITs) are akin to mutual funds but focus on real estate properties. They allow investors to engage in the real estate market without the direct hassles of ownership. REITs invest in a variety of properties, mainly commercial, and generate income through leasing, renting, or selling these assets. Investors benefit from regular income and potential long-term capital gains.

Infrastructure Investment Trusts (InvITs), on the other hand, are similar structures that focus on pooling funds for infrastructure projects like highways, power plants, and pipelines. These trusts manage operational assets and offer returns primarily through dividends and capital appreciation.

Key Differences Between REITs and InvITs

Structure and Investment Focus: REITs and InvITs share a similar structure involving a trustee, sponsor, and manager, yet they diverge in their investment focus. REITs concentrate on real estate assets, ensuring at least 80% of their portfolio is invested in completed and income-generating properties like office spaces, malls, and residential complexes. This focus on real estate provides a relatively stable income through rents and leases. Conversely, InvITs focus on infrastructure projects such as roads, power transmission lines, and renewable energy assets. InvITs invest in both under-construction infrastructure projects, and revenue-generating projects. This focus provides a steady stream of income through long-term contracts and usage fees.
Revenue Generation and Stability: REITs generate revenue primarily through leasing and renting out properties, and a smaller portion through property sales. This model ensures a steady income, making REITs less volatile and relatively stable compared to InvITs. However, they are still subject to market risks and property value fluctuations. InvITs, on the other hand, earn through tolls, tariffs, and usage fees from infrastructure assets. Their revenue streams can be more volatile due to factors like regulatory changes, economic conditions, and asset-specific risks such as project failures.

Risk Involved

REITs

REITs come in two types: publicly traded and non-traded. Publicly traded REITs are listed on stock exchanges, providing liquidity and transparency, but they face interest rate risks. Rising interest rates can increase borrowing costs and make REIT yields less attractive compared to fixed-income securities, leading to potential price declines. Non-traded REITs, while not subject to market volatility, are less liquid and may involve high upfront fees and performance-related risks.

InvITs

InvITs carry their own set of risks, including project failure risks, political or regulatory risks, and challenges in accurately estimating future revenues. Since InvITs invest in infrastructure projects, any delays, cost overruns, or changes in regulations can significantly impact their revenue and profitability. Additionally, the revenue from infrastructure assets can be affected by economic cycles, usage rates, and maintenance costs.

Investment Guidelines and Considerations

Minimum Investment: According to SEBI guidelines, the minimum investment for REITs is set at ₹ 50,000 for 100 units, making them accessible to retail investors. For InvITs, the minimum investment is higher at ₹ 1 lakh for the same number of units, reflecting the larger scale and complexity of infrastructure projects.
Liquidity: REITs tend to be more liquid due to their lower unit price and the familiarity of the real estate sector among retail investors. They are listed on stock exchanges, allowing investors to buy and sell units with relative ease. InvITs, while also traded on the stock exchange, are less liquid due to higher unit prices and the complex nature of infrastructure investments. The liquidity in InvITs can be influenced by the overall market conditions and investor sentiment towards infrastructure projects.
Growth: The growth of a REIT can be seen through asset redevelopment, new constructions, or acquisitions. REITs can enhance their income and asset value by renovating existing properties, constructing new buildings, or acquiring additional real estate assets. For InvITs, growth is determined by acquiring new concession assets through a bidding process. Successful acquisition and management of new projects can lead to increased revenue and asset value for InvITs.

Summing Up

While both REITs and InvITs are still relatively new in India, they provide a structured way to invest in real estate and infrastructure. REITs and InvITs have opened up new avenues for investment, allowing investors to participate in the growth of the real estate and infrastructure sectors without the complexities of direct ownership. These investment vehicles provide diversification benefits, professional management, and access to high-value assets that individual investors might find challenging to acquire on their own. However, it is essential to conduct thorough research, consider personal financial goals, and consult with financial advisors before investing in REITs or InvITs. This comprehensive understanding can help investors navigate the opportunities and risks associated with these innovative investment options.